The Balance of Gold and Silver

Last week, we discussed the growing stress in the credit markets. We noted
this is a reason to buy gold, and likely the reason why gold buying has ticked
up since just before Christmas.

Many people live in countries where another paper scrip is declared to be
money -- to picture the absurdity, just imagine a king declaring that the tide
must roll back and not get his feet wet when his throne is placed on the beach
-- not real money like the US dollar. It should be obvious, but we have
seen much disinformation out there promoting the idea that the dollar is collapsing.
Most of the time, most of these people buy dollars as the escape hatch from
their native currencies.

They buy the dollar first, and gold (for now) is a distant second.

That leads to the question of silver. Do they buy silver in equal measure
as gold, or is silver a distant second to gold, as gold is a distant second
to the dollar?

Theory tells us that gold is more portable. It is much, much more portable.
First, the same weight of gold is about half the volume of silver. A 1oz gold
Maple Leaf coin (which is pure gold) is much smaller than a 1oz silver Maple.
And right now, the value of an ounce of gold is just about 70 times greater
than the value of an ounce of silver. The math works out that the same value
of silver is 126X more bulky than gold.

If you are paying for storage, that may be important. It sure is, if you are
thinking you may need to carry it on your person. A gold bar worth $120,000
would fit in your trouser pocket (a bit heavy at 3kg, but you could do it).
That much silver would be almost 7 of those big bars which are the size of
small loaves of bread. Each. All that silver would weigh about as much as two
heavyweight boxers.

Gold is also more liquid.

What does the data tell us about demand for silver relative to gold right
now?

We will look at that below in the only true picture of supply and demand in
the gold and silver markets. But first, the price and ratio charts.

The Prices of Gold and Silver

Next, this is a graph of the gold price measured in silver, otherwise known
as the gold to silver ratio. It moved down this week. Is it approaching a line
of support?

The Ratio of the Gold Price to the Silver Price

For each metal, we will look at a graph of the basis and cobasis overlaid
with the price of the dollar in terms of the respective metal. It will make
it easier to provide brief commentary. The dollar will be represented in
green, the basis in blue and cobasis in red.

Here is the gold graph.

The Gold Basis and Cobasis and the Dollar Price

The price of the dollar fell a bit more (this is the inverse of the rising
price of gold, measured in dollars, +$14). But look at that move in the cobasis
(i.e. the red line, our measure of scarcity). What does it mean when the price
of gold rises, but the metal becomes more scarce?

We have been saying for a few weeks that fundamental buying -- when people
take real metal home, presumably not to bring it back to the market for the
foreseeable future -- is "sputtering". Last week, gold buying this week was
biased towards speculation on futures. This week, the bias is back to physical
metal.

Our calculated fundamental price of gold is up over $30. It’s just a hair
under $200 over the market price. Gold is being offered at a quite a discount.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

Uh oh. We can see immediately, that the cobasis has fallen in silver about
2/3 as much as it rose in gold. Granted, the price of silver rose 2.9% whereas
that of gold went up only 0.5%. The speculators were much more aggressive in
the silver market, as they often are.

Our calculated silver fundamental price is up about 40 cents, whereas the
market price was up 51 cents. The silver fundamental price is now about $0.80
over the market.

Getting back to our question at the top, we can see in the data that people
buy first gold when they fear credit stress and default. Speculators can temporarily
move the price quite a lot, as they attempt to front-run the market. So, naturally,
they are focusing on the silver market as the general rule when gold goes
up, silver goes up more. That may be true when central banks’ stimulus
efforts are successful in causing an increase in production of goods, including
goods that contain silver.

Less so, when metal buyers are not buying to consume but to opt out of the
banking system.

There are people who buy silver metal in preference to gold, for example those
who cannot afford to buy gold. But at this stage, the balance favors gold.

Keith Weiner is CEO of Monetary Metals, a precious metals fund company in
Scottsdale, Arizona. He is a leading authority in the areas of gold, money,
and credit and has made important contributions to the development of trading
techniques founded upon the analysis of bid-ask spreads. He is founder of DiamondWare,
a software company sold to Nortel in 2008, and he currently serves as president
of the Gold Standard Institute USA.

Weiner attended university at Rensselaer Polytechnic Institute, and earned
his PhD at the New Austrian School of Economics. He blogs about gold and the
dollar, and his articles appear on Zero Hedge, Kitco, and other leading sites.
As a leading authority and advocate for rational monetary policy, he has appeared
on financial television, The Peter Schiff Show and as a speaker at FreedomFest.
He lives with his wife near Phoenix, Arizona.